The Basics of Trading Crude Oil Futures

Crude oil is one of the better commodities to trade. The market is incredibly active, and it's well known to investors around the world. Oil prices fluctuate on the faintest whisper of news regarding pricing, which makes it a favorite of swing and day traders looking for that edge.

This environment can provide some solid trading opportunities, whether your focus is on day trading futures or you are a longer-term trader or investor.

Crude oil is also one of the most actively traded commodities in the world. The price of crude oil affects the price of many other assets, including stocks, bonds, currencies, and even other commodities. The reason? Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector.

Crude Oil Contract Specs

Trading crude can be confusing when you first get into it, and you should memorize these specifications before considering trading:

Ticker symbol: CL

Exchange: NYMEX

Trading hours: 9:00 a.m.–2:30 p.m. ET

Contract size: 1,000 U.S. barrels (42,000 gallons).

Contract months: All months (Jan.–Dec.)

Price quote: Price per barrel (example: $65.50 per barrel)

Tick size: $0.01 per barrel ($10.00 per contract)

Last trading day: Third business day prior to the 25th calendar day of the month preceding the delivery month

Crude Oil Fundamentals

Despite using it every day, not many people know the differences between crude oil and gasoline. It is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and many other petrochemicals. The fundamentals are different since it is a raw product.

Light Sweet Crude Oil is traded on the New York Mercantile Exchange (NYMEX). "Light Sweet" is the most popular grade of crude oil being traded. Another grade of oil is Brent Crude, which is primarily traded in London, and is seeing increased interest. Russia, Saudi Arabia, and the United States are the world’s three largest oil producers as of 2018.

When crude oil is refined or processed, it takes about three barrels of oil to produce two barrels of unleaded gas and one barrel of heating oil. This helps to put into perspective the production needs of crude, and why production/supply levels are watched so closely.

Crude Oil Reports

The main reports for crude oil are found in the EIA Weekly Energy Stocks report. This report is released every Wednesday around 10:30 p.m. ET, with traders eagerly awaiting its arrival.

Tips on Trading Crude Oil Futures

Oil futures are notorious for their volatility. Here are some quick tips that you should look for when tracking price movement and making trades:

The price of unleaded gas and heating oil can influence the price of crude oil.

Demand is generally highest during the summer and winter months. A very hot summer or very active driving season (for summer vacations) can increase the demand for crude oil and cause prices to move higher.

An extremely cold winter causes higher demand for heating oil, which is made from crude oil. This usually causes prices to move higher. Watch the weather in the Northeast, since it's the part of the country that uses heating oil more than any other.

Watch for oil production cuts or increases from OPEC (Organization of Petroleum Exporting Countries), which determines global supply and demand for crude.

Volatile Market for Crude Oil Futures

Crude oil often trades in a volatile environment. Major news events can happen overnight, causing oil prices to swing unpredictably and widely. The same thing can happen throughout the day since crude futures trade around the clock. Whether it's an economic report or tensions in the Middle East, a tight supply situation can exacerbate price movement.

Supply and demand obviously dictate how the price will move, but this market moves on emotion as well, especially with retail investors who day trade.

If tensions escalate in the Middle East, there's no telling the extent of possible supply disruptions, and traders often react swiftly on the news, adjusting their strategy following price fluctuations.

Price Movements for Crude Oil

The reason prices move so swiftly is that traders who have short positions in the market tend to cover their shorts quickly if price creeps up, either eroding their gains or causing losses. In order to do this, they have to place buy orders to cover. This wave of buying is done at the same time speculators are jumping on board to establish or add to long positions. The shorts will cover quickly because the risk is just too great; if a major development arose that disrupted supply, shorts could theoretically lose more money than they invested, resulting in a margin call from their brokerage, one of the most dreaded calls in the world of investors.

The usual tendency is for oil prices to spike on news of turmoil in the Middle East. Then prices calm down and start to move lower, unless there's irrefutable evidence of major supply disruptions. Identifying these waves of buying and selling are very important if you want to avoid getting a haircut in the financial markets.

For the most part, crude oil tends to be a trending market, driven largely by psychological movement. There's usually a major bias to the upside or downside. Trading from the trending side will certainly help improve your odds of success. Crude oil also tends to get stuck in prolonged ranges after a sizable move. A person who can identify these ranges has plenty of opportunities to buy at the low end and sell at the high end. Some investors trade the ranges until there's a clear breakout either way.

The value of the U.S. dollar is a major component in the price of oil. A higher dollar puts pressure on oil prices. A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tend to support higher oil prices. However, oil prices moving too high can stifle the economy. Historically, oil prices tend to move opposite the stock market. This trend becomes a concern when oil prices approach the psychological price marker of $100 a barrel.

Day Trading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts very well to pivot points and support and resistance levels. You have to make sure you use stops in this market, as it can make very swift runs at any given time. Longtime energy trader Mark Fisher wrote an excellent book on day trading oil futures titled "The Logical Trader."

There's no shortage of trading opportunities. Most traders close their position EOD to ensure they sleep at night, considering overnight volatility.

Many of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the E-mini S&P, you'll probably like crude oil, too.

Crude Oil Futures Trends

Crude oil entered a bear market in June 2014 when the price was just under $108 per barrel on the active month NYMEX crude oil futures contract. By February 2016, the price depreciated to under $30 per barrel. As of January 2019, the price is on the rise, trending at around $53.84 per barrel for WTI Crude.